Sunday, November 30, 2008

Efficient Electricity

If oil is the economy's lifeblood, then electricity is its life-force.

From 1949 to 1980, US electricity consumption grew at 7% CAGR – nearly twice real GDP. After 1980, this dropped to 2%, or two-thirds of GDP.

The chart below illustrates two dynamics (both as five-year moving averages to approximate the average economic cycle):

  • relative growth of GDP to consumption, and
  • GDP-per-KWh (adjusted for total households).

(For consumption, we use total sales to residential, commercial, industrial and transportation sectors.)

Significant decade-by-decade patterns underlie the long-term trend:

In the 1980s, the PC emerged as a potent energy-burning productivity tool, and economic growth began surpassing consumption growth. In the 2000s, the Internet produced the same effect, and this differential accelerated.

Low inflation and consumer electronics penetration contributed to higher GDP-per-KWh in the 50s and 60s; GDP per household, though, was also low.

Key factors separate the 2000s from the 1990s, resulting in higher GDP-per-KWh: IT productivity, financial leverage (a not-unrelated factor) and new revenue opportunities in emerging markets (also not unrelated).

The 1990s, in contrast, witnessed an enormous peace dividend. This opened military industrial capacity to private consumption; the information revolution did not arrive until late in the decade.

Once again, political upheaval is underway: a throwback to Keynesian economics. Unlike prior periods, vast commercial networks interconnect the global landscape, while the Internet continues to shrink the world.

More than ever, electricity efficiency reflects global competition for capital.

So what now? Does government intervention stifle this efficiency? Would the Internet economy allow this to happen?

Tuesday, November 18, 2008

Mutually Assured Destruction

We're all stressed about the economy and our finances.

For an increasing number of us, though, it's a question of survival. How do I get from today to year end when my income is down 50% and threatening to go to zero, and my already-stripped-down expenses haven't budged?

This is the type of uncertainty that forces us to reduce our outlooks from years to weeks – and, indeed, days.

What do I absolutely need, what can I jettison?
Problem is, asset markets are rapidly deflating. You name it: stocks, bonds, property, commodities; we’re collectively mired in one heckuva across-the-board event.

The paper values of everything we possess are sinking fast; even more so if we actually unload them, because, in this market, one seller begets two more, and so on.

The vicious circle would have no end, if not for a critical market dynamic.

As more and more of us shorten our timeframes, such that the sacrifices of a few become the sacrifices of many, we become less able to use time to arbitrage against each other.

Not only do the dollars I owe become somebody else's revenue risk, they also amount to a proportionate sense of pain. And the less able folks are to withstand this, the more likely (and faster) they will renegotiate transaction terms.

Eventually, against the threat of nuclear oblivion, we find a point of stability, because it's in no one's best interest for mutually assured destruction to actually take place.

What that point is, or when it occurs? Nobody knows – least of all the Beltway's denizens.

Sunday, November 16, 2008

Primary Care: Profession in Peril

In medicine it pays to specialize. According to one recent study, specialists earn more than two-times the pay of primary care physicians ("PCPs").

Listed below are a few of the more sobering truths about the primary care profession:

  • From 1995 to 2003, inflation-adjusted income declined 10%.
  • PCPs feature the lowest average salary among provider-types.
  • Primary care ranks at the bottom of residency positions filled.
  • Only 2% of graduating medical students choose to become a PCP.
  • Since the early 90s, 20% have left their profession; 62% say they'll leave if Medicare doesn't increase payout.
  • 44% of family-medicine residents attended U.S. medical graduate schools versus 72% in 1997.
  • By 2025, experts expect demographics to increase demand by 25%; supply, meanwhile, will only increase between 2% and 7%.
  • Currently, 20% of Americans don't have access to primary care.

Many believe these speak to the heart of our health care problem: big dollars wasted on poor outcomes. We may enjoy the world's best radiologists and orthopedic surgeons, but the system is either too quick to refer us, or simply doesn't address the full episode of care.

And it’s not a question of market forces reshaping the profession. With Medicare the default price-setter – and implementing a payment structure strongly favoring specialists – they simply don’t apply. The chart below shows this as the percentage of primary care positions filled against Medicare expenditures as a percentage of GDP.

But what if the market economy did apply? Probably the only person more grateful than the PCP would be the consumer himself.

Tuesday, November 11, 2008

Collective Wisdom

James Surowiecki's 2004 bestseller "The Wisdom of Crowds" popularized scientific evidence supporting how large numbers of people can collaborate as independent thinkers and more accurately solve complex problems than any one individual.

“The wisdom of crowds has a far more beneficial impact on our everyday lives than we recognize, and its implications for the future are immense,” he writes.

As expressed through Facebook or World of Warcraft, no demographic would seem to grasp this better than young adults: specifically, 18 to 29 year-olds.

In the presidential election, this segment voted for Barack Obama by a 2:1 margin. Observers point out an even split would have given John McCain the win.

Indeed, its collective wisdom made for an historic outcome, but has it also contradicted its networked nature's core principles? The answer depends on how much it's anticipated the policies of a larger and even more interventionist government.

Surowiecki acknowledges that because groups are typically unwise about their own wisdom, they require a leader to draw this out. He also states that the potential for bottom-up decision-making is becoming more plausible.

Since early September, the current administration and Congress have dramatically undercut market forces, favoring instead taxpayer bailouts and backstops. Although full consequences will not materialize until months and years ahead, the "leader" in this case has clearly imposed itself over the wisdom of market-based price discovery.

The government-knows-best approach could well extend. Ultimately, it will find itself pushing against the countervailing force of collective wisdom and its expansive parameters.